Super bodies defend 'cheaper' group insurance

Speaking to ifa, ASFA chief executive Pauline Vamos said that a majority of life insurance sums, including 71 per cent of total death benefit and 88 per cent of total TPD sums, are held within superannuation, due in part to its cost-effective nature and accessibility.

"Insurance tends to be cheaper within superannuation, reflecting the tax efficiency of the arrangement, the absence of high-cost distribution (and commissions to insurance advisers), the simple product design and the wholesale contracts which provide economies of scale," Ms Vamos said.

"Reduced underwriting is a benefit for members. Group insurance arrangements generally incorporate some level of 'automatic acceptance'. Members receive insurance cover within their superannuation fund (up to prescribed limits) without the need to go through individual underwriting and medical testing.

"We believe that, on the whole, group insurance claims are processed efficiently. There will be exceptions –this is the same with individual insurance claims," she said.

The Australian Institute of Superannuation Trustees' executive manager of policy and research, David Haynes, agreed and said that underwriting is "still a key aspect of group policies".

"Group policies are an agreement between the super fund and their insurer," he said.

"The insurance claims process can be complex and often involves a number of medical and legal professionals regardless of how the policy is taken out. There is an understanding amongst the industry that funds must make this as simple as possible in order to provide the best possible member experience."

However, as far back as 2014, the Australian Prudential Regulation Authority (APRA) raised concerns about the long-term sustainability of group insurance, with the market feeling the effects of a "significant" increase in claims numbers and duration that APRA said may hit the insurers' bottom line.

In its 2013 Insights Report, APRA said it had observed poor practices in tendering and pricing of large group insurance policies over many years, with the margins being too finely tuned to withstand even a small upward change in claims.

The regulator emphasised that pressure would also be applied by an uptick in mental health claims.

Speaking to ifa's sister publication SMSF Adviser, Sonia Cruz, a senior consultant at The Fold Legal flagged concerns with the group insurance market, saying that it is not always as cost-effective for super fund members as it may look. 

"You'll have advisers recommend insurance within superannuation, and in some instances I've seen cases where the insurance premiums actually exceed the superannuation guarantee contributions that the client makes," she said.

Despite these concerns, Mr Haynes emphasised that the tendering process between superannuation funds and insurance was "rigorous".

"Funds are determined on getting the best outcomes for members. Contracts vary in length and are regularly reviewed," he said.

Ms Vamos added that funds are required by APRA to perform a detailed review of prospective insurers before entering into group insurance arrangements.

"The insurance benefits offered must be suitable for members of the particular superannuation fund. The issues that are subject to review are broad and include pricing, insurance product design, administration and claims processes," she said.

Last week, a Four Corners and Fairfax Media investigation discovered problems with claims handling at CommInsure, including CommInsure's allegedly using out-dated definitions for medical conditions that included heart attacks. As a result, the CBA subsidiary announced that it would overhaul its insurance offering, upgrading illness definitions and setting up an Independent Review Panel.

It was revealed that the four policyholders featured in the Fairfax investigation were members of industry superannuation funds. Funds including CARE, Kinetic and HESTA have group insurance contracts with CommInsure.

Over the 12 months to December 2015, total in-force group risk business increased by 14 per cent to $6 billion, according to figures by DEXX&R.
 
For the same period, all of the top 10 companies in the group risk market recorded increases in in-force group business. TAL regained market leadership in the group risk segment with a 27 per cent increase to $1.7 billion in in-force premiums following TAL’s appointment as insurer to the Cbus industry fund.